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Judge Rules Against I.R.S. in Shelter Case

The Internal Revenue Service has suffered a legal setback in its effort to prove that the BDO Seidman accounting firm sold and marketed questionable tax shelters in recent years.

In a ruling dated last Wednesday, a judge said that BDO Seidman, which is based in Chicago, did not have to turn over to the government 267 documents detailing work for specific clients on questionable tax shelters. Judge James F. Holderman, of the Federal District Court for the Northern District of Illinois, wrote that the I.R.S. had failed to prove that the accounting firm had engaged in widespread illegal practices in its work on the type of tax shelter in question.

The judge sided with BDO Seidman, which argued that the documents were protected by confidentiality governing the secrecy of communications between a firm and its clients, including attorney-client privilege, work product privilege and tax practitioner privilege. A 1998 law on privilege gives accountants the same protection as lawyers. The confidentiality privileges are waived, however, in situations involving crime or fraud.

In his ruling, Judge Holderman made an exception for one document, an e-mail message that he said might fall under the rule excepting crime or fraud situations.

The tax shelter in the case is called a Cobra, short for currency options bring reward alternatives. The I.R.S., which has never considered the Cobra shelter valid for deductions, formally banned it in 2000.

In its war on questionable tax shelters, the I.R.S. has been trying to obtain the documents to prove that BDO Seidman worked with accounting, financial and law firms to engage in the widespread sales and marketing of abusive questionable shelters.

Judge Holderman's ruling mirrors a similar one that he made last July that upheld confidentiality protection for more than 100 BDO Seidman documents that the government had sought.

Judge Holderman's ruling contrasts, however, with recent rulings by other judges, including Judge Shira A. Scheindlin of Federal District Court in New York, on similar cases involving BDO Seidman and other firms.